The Palestinians have called off peace talks with the Israeli government after a decision to approve 1,600 new homes to be built in East Jerusalem, despite an apology from Israeli Prime Minister Binyamin Netanyahu.

Israel’s approval of the houses, which came 24 hours after indirect talks between Israeli and the Palestinians were announced, brokered by US special envoy to the Middle East, George Mitchell.

The homes are to be built for a strictly-Orthodox community in Ramat Shlomo near the Palestinian village of Shuafat.

But now the chief Palestinian negotiator Saeb Erekat has said the talks have been cancelled because of the approval of the housing.

He said: “We want to hear from Mitchell that Israel has cancelled the decision to build housing units before we start the negotiations."

Israeli Prime Minister Binyamin Netanyahu said he had not been informed of the decision on the new houses, which was announced by Interior Minister Eli Yishai. A spokesman for the Prime Minister said: "The prime minister spoke with Vice President Biden and expressed his regret over the unsuccessful timing.

"The project in the Ramat Shlomo neighborhood underwent a number of planning stages in the past few years and that the final planning go-ahead will apparently only be given in more than a year and that the actual building will likely start only in another few years."

The new homes lie within the borders drawn up by Israel when it annexed East Jerusalem after capturing it 1967.

Foreign Secretary David Miliband expressed his disappointment at the approval of the homes.

He commented: “This is a bad decision at the wrong time. It will give strength to those who argue that Israel is not serious about peace.

"The recently launched proximity talks are an important opportunity to move towards a peace deal between Israelis and Palestinians. Real peace will require the courage, commitment and compromise of both sides. This needs to be demonstrated not only by words, but by actions.

“The leadership of both sides must restrain those who try to provoke or disrupt the situation at this crucial moment of opportunity.”